If Donald Trump wins debate, stocks likely to tank

Expect stocks to tumble if Donald Trump has a great first debate night.

Wall Street doesn't want a President Trump (with the exception of a few hedge fund managers and Trump supporters, like Carl Icahn). As the old saying goes, the market loves good news, it can deal with bad news, but it hates uncertainty. And Trump is the motherlode of uncertainty.

"The typical investor just can't contemplate the possibility of a Trump victory," says Cary Leahey, chief U.S. economist at Decision Economics.

As polls tighten -- CNN now calls it a "dead heat" -- Wall Street is having to come to terms that the possibility of a President Trump is real...and rising. With the debate looming on Monday, the Dow fell 167 points.

A strong debate performance by Trump on Monday will exacerbate those worries.

"If for some reason Trump puts on a presidential showing...and Clinton stumbles for whatever reason, then the market may take another reassessment," says Leahey. That's the polite way of saying, stocks are likely to fall.

The reality is stocks are already pretty pricey. They aren't at bubble level, says Tim Anderson, managing director of MND Partners. But with the economy stalling at ho-hum growth of 1% to 2% and companies expected to have a sixth quarter of falling earnings, investors are hitting the "pause" button.

Are we in for another Brexit vote? Traders are starting to wonder. Consider what happened in the lead up to Brexit: few thought it would happen until polls began to tighten shortly before the election. Stocks in the U.K. and Europe -- and even around the world -- began to zig and zag up and down as sentiment shifted. Then markets plummeted (albiet only for a few days) are Brexit.

"I think this one needs a fat lady singing," says economist Diane Swonk of DS Economics. Uncertainty will reign "until we know the outcome of the election and who's going to be in key post."

In a new report out this week, Wells Farg (WFC)puts the probability of a Clinton win at only 50%. The bank says that would be "neutral" or "slightly positive" for investors. In contrast, a Trump victory would be "negative" or "slightly negative."

Many Wall Street banks have reached a similar conclusion: Clinton would be better for the economy and market.

"Markets, in general, are apt to do better under a Clinton Administration," said UBS in late August.

For now, U.S. stock indices are close to record levels and U.S. government bond yields are very low. Investors appear to be pricing in a Clinton win. If Trump continues to surge, investors will have to figure out just how scared of Trump they really are.